Summary YieldMax has launched ETFs based on selling call options against high-beta stocks like Coinbase, Tesla, Nvidia, and more. CONY aims to provide monthly income distributions and exposure to COIN's upside, with a net long position of around 80%. CONY offers a 4.16% 30-day yield and a 51.97% distribution rate, but there may be hidden risks involved. These risks are primarily concentrated in the options strategy and have left a 20% return gap between CONY and COIN since launch. Introduction This year, YieldMax has launched a full suite of ETFs based around selling call options against high beta (very volatile) stocks like Coinbase Global, Inc. ( COIN ), Tesla, Inc. ( TSLA ), and more. Coinbase is a cryptocurrency exchange and financial services company ( only a few other services, honestly ), and as such, is an incredibly volatile stock. This has attracted options traders who seek to profit from the volatility. Enter the YieldMax COIN Option Income Strategy ETF ( CONY ), one of many covered-call-driven funds YieldMax debuted this past September. Every time I cover YieldMax ETFs, the list seems to grow by a few more tickers. Figure 1 (YieldMax) Last month, I covered TSLY, a sister fund to CONY. If you want to see my coverage of its similar strategy, where I discuss TSLA surprisingly little, check it out here . CONY aims to, just like the rest of the YieldMax funds, provide monthly income distributions and exposure to COIN's upside. The fund managers state that they aim for about 80% price upside, meaning that they are net short 20% or so at any given time. This fluctuates day to day, of course, as the managers trade daily. Figure 2 (YieldMax) With a 4.16% 30-day yield and a 51.97% distribution rate, income investors may be tempted by this fund. Unfortunately, there is more risk than is immediately apparent in CONY, and I am giving it a sell rating for now. It does not merit consideration for an income portfolio, as it has some inherent flaws in its strategy that I do not consider acceptable for investment. The Strategy YieldMax describes the general strategy of their ETFs below in Figure 3. Figure 3 (YieldMax) A "synthetic covered call" is options-speak for the capital-efficient strategy of using options to replicate stock exposure. It's capital efficient because synthetic stock exposure can be built using margin to secure the short put being sold. The premium from the sale of the short put is then used to offset the cost of the long call. This means that the actual cash NAV of the fund can be held in treasury bonds, providing a small boost to yield and, assuming they are held to maturity, absolute returns. These are great underlying holdings because they are not volatile and will provide a stable, albeit middling, return without causing large swings in margin maintenance requirements. As for CONY, US Treasuries, or UST, makeup 100% of the underlying holdings, and it still has 4.97% of NAV in cash. This is likely cash held to pay out dividends and to buy-to-close their short options positions should they need to do that instead of rolling for a credit. Keeping options premium in cash, plus some extra to cover losses, is prudent for actively managed funds because when you are trading live options, UST liquidity isn't enough to be competitive on the level investors expect from CONY. Execution matters a lot, and these funds sell thousands of contracts at a time. Liquidity can dry up fast on certain strikes, so having cash available to trade at the right moment is very important. Figure 4 (YieldMax) Note that one of their UST holdings (purchased at a discount, but still with an abysmal yield) is maturing in a month. Hopefully, the managers will be able to participate in a new auction and pick up UST with much higher yields. If you're interested in keeping up with their changes, here is the auction schedule . It is also possible for them to roll into an existing note and buying it at a discount. These new USTs yielding upwards of 5% could give CONY a decent "yield floor." No matter what yield they end up with after their change, it is a small buffer for CONY's dividends, as USTs also pay monthly coupons. The bigger the coupons, the less risk the managers will need to take with picking strikes. For this reason, I would absolutely like to see them pick up more recently issued bonds or new bonds from auction next month. As far as the options positions go, if you plot a payoff chart using CONY's current holdings, it looks like this: Figure 5 (OptionsStrat) The shape of the curve at the top is due to the staggered short calls, on 12/8 and 12/22. With the market pricing in a 61% chance of success, this isn't necessarily a "lotto ticket" options trade, but it is far from a high probability trade that many folks think of when they think about covered call funds. These are fairly aggressive strikes. For those interested in the "Greeks" of the position, here you are. Figure 6 (OptionsStrat) Note that the position has negative Vega, meaning that a rise in implied volatility would work against this position. This means that YieldMax is betting on realized volatility being less than implied volatility. If they're wrong, the position could lose money even if COIN's price goes up. This introduces us to a new risk to consider for all YieldMax funds. Drawdowns CONY is relatively new, meaning that it hasn't had time to experience a severe drawdown. Its underlying stock, COIN, can have very sudden drops. Here is their all-time chart to illustrate. Data by YCharts How underwater investors are, from IPO to now, is easiest to see in the drawdown chart. Figure 10 (Portfolio Visualizer) COIN investors lost 24.15% from 3/31/22-4/30/22. These dates fall within the same timeframe of the current options trades. That would've been a very, very bad time to hold CONY had it been around. This fund would have seen almost the entirety of that drop as well, since it is not properly hedged in any way other than the short call premium, which ends up being distributed to shareholders anyway, so isn't very useful for preserving NAV. This is a risk amplified by CONY's net negative Vega mentioned earlier. CONY did not exist for any of these drawdowns, as it launched in September this year, so we don't have any good data on how it may handle another inevitable swing to the downside. COIN had a max drawdown from Nov. '21 to Dec. 22' of 88.92%. While there would've been some excess returns from sold calls that expired, I wonder how CONY would've done. Because their strategy involves real-time, active intervention in their trades, it's impossible to know what the managers may have done in the past. For this reason, we only have a vague idea on how CONY would've done during these periods. The real question we're all asking: So how's it done so far? Performance Well, it's okay. Underwhelming. Data by YCharts There was a solid period of outperformance for CONY through October and into November, albeit slight outperformance. Note where CONY started falling short, starting a few weeks ago. This is due to CONY's capped upside. Even as COIN ran, CONY would breach its strikes and not be able to participate in any more upside. The greatest risk present here is that with a capped upside and an unhedged downside, there is little to protect CONY from suffering another sharp drawdown in COIN and devastating investors. The best part about holding high beta stocks like COIN is that when they run up, they run up. If you miss out on that upside, you won't be able to recover from the drawdowns. This could lead to "NAV erosion," which is where funds will need to cannibalize their underlying assets in order to pay dividends to investors since their options positions resulted in losses. Data by YCharts As far as dividend performance is concerned, we don't have much data since there have only been two distributions so far. Data by YCharts Dividend-wise, we can expect to see something close to 10% once it evens out. This may change, as holdings change and as COIN changes, but for now, this is what investors should expect. This may change wildly, and I do not expect stability from their distributions. Summary The YieldMax COIN Option Income ETF offers investors an eye-watering distribution yield but comes with risks that make it an unworthy investment for income-seekers. Due to Coinbase's volatile nature and the strategy's capped upside, CONY cannot participate in the same upside COIN investors hold COIN for. The distributions so far have left a 20% gap in total return between the two. Ultimately, I must rate this fund a sell and caution investors about the risks of the CONY's strategy. P.S. How do you pronounce CONY? With TSLY, I say "tes-lee." I don't like "coh-nee" because it reminds me of the Ugandan militant we associate with 2012. "koy-nee" is what I'm currently going with. Please tell me in the comments if you have something better.
